"Our motivation here is to meet Oregon law and we're trying to do that as cost effectively as possible." - Scott Bolton, PacifiCorp VP

PacifiCorp cut a deal this fall to buy power from a
solar farm in south-central Oregon that - if it gets built - will be heavily
subsidized by Oregon taxpayers and ratepayers.

There was only one problem: The Stone House project in
Christmas Valley is too big to comply with the 5 megawatt electrical output
limit under the state's solar procurement mandates. But if its developer
downsizes the project's output to fit those limits, it could potentially lose
eligibility for a tax credit of up to $10 million.

Losing that golden ducat would ruin the project's
economics, jacking up the price of its output and potentially making it a
non-contender in the competitive bidding process that PacifiCorp was using to
buy solar power.

To move forward, PacifiCorp selected the project's
low-cost but non-compliant bid, then immediately asked the Oregon Public
Utility Commission to waive its procurement rules governing the size of the
resource.

The PUC quickly acquiesced, apparently for good cause.
The state Department of Energy, meanwhile, refuses to say how it will apply its tax
credit rules until its gets a final application from the developer.

Staff at the PUC say the project's eligibility for the
public subsidy never entered their thinking. Theirs was simply a technical
waiver based on the developers' plan to use an inverter that would clip the
project's electrical output to match the 5 megawatt limit under the
rules.

It's an unconventional design that dumps a good chunk of
the project's output at peak sunlight. But the PUC says the extra capacity
should result in higher and flatter off-peak output that maximizes PacifiCorp's
energy take, even as the panels degrade with age. The tax credit, they say, is
simply a bonus that reduces costs for ratepayers, one they're happy to see go
forward.

Nevertheless, the PUC's blessing is the latest assist by
state officials to get the solar farm built. It needs another one from the
Department of Energy. The tax credit is critical for the project's economics,
covering half the cost. But it brings little return to taxpayers in the form of
jobs, green energy or tax revenue.

PacifiCorp is required to buy 8.7 megawatts of solar
energy by 2020, whether taxpayers subsidize this project or not. That
obligation comes under a solar procurement standard the Legislature passed in
2009.

The solar mandate comprises a small fraction of the green
power the state's largest utilities are required to buy: 25 percent of their
customers demand by 2025. Most of that larger obligation will be met with wind
power because it's cheaper and more scalable. But the solar procurement mandate
provided a carve-out for solar developers, and if utilities meet the solar
requirements by 2016, they get double credit for compliance with the larger
mandates.

Energy subsidy lives on in Christmas ValleyThe Oregon Department of Energy has serially extended one proposed solar farm's eligibility for a $10 million taxpayers subsidy, though construction of the project came to a stop in 2009 and the small array of solar panels came down the following year.

In 2012, PacifiCorp bought the 2 megawatt Black Cap
solar project near Lakeview. That project received a $5.6 million tax credit
from Oregon taxpayers, which the developer sold to PacifiCorp's sister company,
BNSF Railway, also a subsidiary of Warren Buffett's Berkshire Hathaway.

That leaves PacifiCorp with a 6.7 megawatt hole.
And the Stone House project seemed destined to fill it.

Because Portland General Electric has already satisfied
its solar obligation, PacifiCorp is the only viable utility buyer for a project
of this size.

The original developer of the project tried to get a
power purchase agreement with PacifiCorp, but the Pullman, Wash., dentist was
never able to seal the deal, and flipped the development rights to Element
Power in late 2012. The man who brokered that deal was Peter Blood, an energy
entrepreneur and personal friend of Pacific Power chief executive Pat Reiten,
though the utility says Reiten has no influence on the procurement, which is
run through an affiliate. The project manager for Element Power, Dennis
Desmarais, is also a former PacifiCorp manager.

The payout to the sellers and developer is dependent on
whether the project gets built. And that in turn is dependent on whether it can
secure financing. PacifiCorp's agreement to buy the power makes that more
likely.

Scott Bolton, a vice president and lobbyist for
PacifiCorp, says the utility ran a competitive – and confidential - bid process
and picked the low-cost option. He says that process was in no way tailored to
buy the Stone House project.

"Our motivation here is to meet Oregon law and
we're trying to do that as cost effectively as possible," he said. If
Element can't deliver on its bid, he said, the utility will go back to its pool
of bidders and choose another project.

And that comes back to the tax credit.

It's no secret that Stone House is the last solar
project eligible for a $10 million tax credit under the controversial and now
defunct business energy tax credit program. Legislators, tired of the program's
mushrooming cost and abuses of its loose rules, voted to kill it in 2010, with
a 2012 sunset. But they grandfathered in pre-approved projects that were under
construction before April 2011, giving them until July 2014 to finish
construction and finalize their subsidy.

The Oregonian investigated Stone House's eligibility for
a tax credit this fall. The newspaper found, among other things, that the
Department of Energy had repeatedly extended the project's eligibility for a
tax credit despite evidence that its original owner didn't meet requirements to
start construction on the massive project he was approved to build before April
2011. ODOE also kept the subsidy alive for Element, which plans to start from
scratch on the solar array.

The Department of Energy's deputy director, Michael
Kaplan, was asked to account for the agency's extension of the Stone Housetax
credit at last week's meeting of the Senate Environment and Natural Resources
Committee. Kaplan and another agency manager, Maureen Bock, insisted the
project met the requirements, and that the BETC program in general had been a
big success.

The committee's chairman Sen. Michael Dembrow,
D-Portland, says he'll hold off judgment until the project is complete. But the
vice-chairman Sen. Alan Olsen, R-Canby, was skeptical, even after meeting with
agency officials to discuss the tax credit extension. "To me it's a done deal,"
he said, "but it just looked like a scam from any practical
viewpoint."

Program rules appear to require Element to build a
project with equipment capacity within 10 percent of the originally approved
specification. If the project's output is clipped to 5 megawatts, it's not
clear if that is achievable. Element did not return The Oregonian's call for
comment, and ODOE's Kaplan on Thursday refused to "speculate" how its
rule will be applied to the project until it receives a final application. He did
suggest the agency has some flexibility if there are other improvements in the
project design. The original estimated output of the project was redacted in
the Department's release of records to The Oregonian, though the information
isn't proprietary.

Anthony Buckley, administrator of energy development
service at the agency, suggested Element can effectively build whatever size
project it wants and the department will size its tax credit accordingly, as
long as it's not greater than $10 million.

There is other goods news on the subsidy front for
PacifiCorp. The Energy Trust of Oregon has agreed to provide another subsidy
for the project out of the pot of ratepayer money it administers to incentivize
energy efficiency and renewable energy projects.

Energy Trust officials told PacifiCorp early last year
that they weren't providing subsidies for utility scale solar farms. It had
different budget priorities. By the end of the year, however, the trust had
cash left in its budget, so it agreed to sweeten the Stone House subsidy pot
with $520,000.